MicroVision Inc (MVIS) 2002 Q3 法說會逐字稿

Good afternoon. My name is Kerry and I will be your conference facilitator today. At this time I would like to welcome everyone to the Microvision third-quarter 2002 financial results conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star and then the number 1 on your telephone keypad. If you would like to withdraw your question, press star and the number 2 on your telephone keypad. I would like to now turn the call over to Mr. Brian Heagler. Thank you, sir, you may begin.

Thank you, I would like to welcome everyone to Microvision's third-quarter 2002 financial results conference call.

A press release highlighting the quarterly performance was distributed after the market closed today. If you do not have a copy of the release, please call us at 425-415-6758. We will be happy to send you one following this call. With us today are Rick Rutkowski, Chief Executive Officer, Stephen Willey, President, Richard Raisig, Chief Financial Officer, Tom Sanko, Vice President of Marketing, and Tom Mino, Chief Executive Officer of Lumera. We will begin with a brief overview of the third quarter and then we'll available to take your questions.

The information in today's call includes forward-looking statements regarding projections of revenues, expenses and losses, and cost of product developments in manufacturing. Sales, signing of contracts, future operations and capital needs, as well as statements containing words like believe and participate, estimate, intend, seek, expect, and other similar expressions. These statements are not guarantees of future performance.

Uncertainties or other factors may cause actual results to differ materially from the future results implied or expressed in the forward-looking statements. Such factors include but are not limited to: market acceptance of our technologies and projects; ability to obtain financing; our financial and technical resources relative to those of our competitors; our ability to keep up with rapid technological change; government regulation of our technology; our ability to enforce our intellectual property rights and protect our propriety technology; our ability to obtain additional contract awards and develop successful distribution and marketing alliances; timing of commercial product launches; the ability to achieve key technical milestones and dependencies of developments of third parties in certain technologies used by us.

Additional information about the most significant of such factors is set forth in Microvision's reports filed with the security and exchange commission, including our most recent annual report on 10-K. The company does not update or revise its forward-looking statement even if experience or future changes make clear that any projected results thus or implied herein will not be realized. I would like to turn the call over to Rick Rutkowski.

Thank you, Brian. Thank you everyone for joining us this afternoon.

A couple of footnotes before we start. It is afternoon and in the past we have done these calls in the morning our time. The reason for the change is to simply accommodate investors. We inquired with a number of our existing shareholders and institutional investors in particular, and got back a strong preference for having the call not during market hours, and, of course, for us on the West Coast, that means after the close. So that's really the reason for change, and I expect we will stick with this convention going forward.

A couple of other items. Two people, Bill Sydnes our Chief Operating Officer, and Andrew Lee, our Vice President of Sales, who were on our last call and will typically be on these calls are not joining us today because they are traveling on business, and, in fact, working on a very important pending deal for us. So we will excuse them for the moment and attempt to answer any questions that would fall within their purview typically.

We have a very solid quarter to report. Mostly in line with our expectation, probably $4.2 million is a shade below where we would have liked to come in for top-line revenue for the quarter. If you recall during our last call, we were guiding flat to slightly lower. This is a little bit below what we would have liked to achieve in top-line revenue.

Having said that, our net loss per share of 37 cents is about in line or ahead of where we would like to be and I believe we have beaten consensus estimate with that number. I think that's thematically important here. We have begun to emphasize cash flow. We have begun to emphasize controlling and reducing costs going forward, and we are seeing good results in that regard.

Revenue for the quarter did increase 74%, versus the same period last year when we reported $2.4 million. Revenue for the nine months, also a substantial increase, $12.7 million, 95% comparison to the $6.5 million for same period in 2001.

As you know, the increase in revenue was due principally to increased contract revenue from both U.S. government, and I think notably here, commercial development contracts. I say "notably" because 2002 was really the first year where we have had meaningful revenue deriving from developments sponsored by commercial partners. Some of the names there are BMW, Johnson & Johnson. We continue to look forward to work from our Asian partner who has declined yet to be named, but the importance of the work will we will speak to as we go here this afternoon.

Backlog for development contracts at September 30, was 4.0 million. For the three months ended September 30, the company reported a loss from operations of $7.5 million, and, again, emphasizing a very strong improvement compared to loss from operations last year of $11.8 million for the same period.

For the nine months similar comparisons. A loss from operations of $26 million versus $34 -- almost $35, $34.6 million for the same period in 2001. For the three months ended September 30, we reported a consolidated net loss of $5.4 million or 37 cents per share, again, comparing very favorably to a net loss of $8.2 million or 68 cents per share for the same period in '01 and to consolidated net loss of $6.6 million or 49 cents per share for the second quarter of '02.

So we are very pleased with this very favorable move towards reduced operating costs and net operating losses generally. And I think it is a trend we are certainly driving toward.

For the nine months ended September 30, the company reported a consolidated net loss of $23.3 million or $1.48 per share compared to $27 million or two and a quarter per share for the same period last year. As most of you know our consolidated includes Microvision, as well as our subsidiary Lumera Corporation. Just to break that out for you for the three and nine months ended September 30, '02, the portion of consolidated net loss attributable to Lumera was $235,000 or 2 cents per share and $699,000 or 5 cents per share, respectively compared to $341,000 or 3 cents per share and $2.9 million or 24 cents per share for the three and nine months ended September 30, '01 respectively. We did end the quarter including Lumera with a cash position of $20.5 million, including cash equivalents and investment securities.

We have indicated that we expect revenue for the fourth quarter to be in the range of $4.5 to $5 million. This is below our previous expectations. We do expect to see an increase from the third quarter but product sales seem to be somewhat variable and to be impacted by lingering economic weakness as well as a longer than expected sales cycle for the Nomad. We'll see an impact here as well from the recently-reduced price of Nomad impacting the top line although gross contribution we shouldn't see much impact from that price reduction.

The other factor impacting Q4 margin -- Q4 revenue, pardon me, is the delayed introduction of the Flic bar code scanner, and I will speak to all of these issues as we move through the call here.

I want to say to sort of frame our remarks and introduce them that thematically, the company really focuses on three things. The first is product revenue. I would mention along with that as I have done footnoting also the importance of commercial contract revenue as a new revenue stream and opportunity for the company. And we've seen good results in '02 and optimistic we can deliver those results again in '03 in commercial contract revenue.

Product revenue, I think we want to spend a fair amount of time today on in terms of talking about the Nomad opportunity and what kinds of advances we have seen since our last call in the market development relating to Nomad. We are all quite pleased with what we are seeing, and we would like to share that with you today.

The second item thematically here is controlling and reducing costs. We are seeing good results from our -- our most recent cost reductions and or ability to control costs. We continue to see very positive results. Obviously the move here is to take the company toward profitability while driving growth with product pipeline -- with a very robust product pipeline. And obviously, profitability is the third element of that three-scheme thematic framework here. Product revenue, controlling and reducing costs, and driving toward profitability, while at the same time managing for high growth continue to be the themes for the operating plan.

I would like to begin the discussion here relating to product revenue with the discussion of both Nomad and Flic, and then move on to some of the issues relating to future developments and our development contract line of business, and in particular, talk about some of our future products coming into the pipeline as we move toward the end of the call.

I have asked Tom Sanko, our Vice President of marketing, to join us today to really characterize the progress that we have made in bringing the Nomad personal display to market. Tom will also join us in talking about the Flic, although Steve Willey and myself will speak to the issue of bringing Flic into production. Tom can certainly talk about the channel development issues associated with that. So, Tom, maybe you can talk to us about Nomad and the focus on applications and where we are today versus where we were just a few months ago.

Okay. Thank you, Rick. Good afternoon, everybody.

Last time that I addressed this group was three months ago, and we were talking about Nomad in the context of really getting started. If you remember, we had a number of product-related issues that we had just put behind us, and we were really just getting our feet wet in a lot of these applications that Rick alluded to.

We had just completed a big air show in Oshkosh, Wisconsin, and had related some feedback from that show. We talked about home marketing agreements with Silicon Graphics and Antelope Technologies. We also talked about lumpy demand and an unknown sales cycle. Well, I am pleased to report that we have taken those three months and really applied a lot of our resources to essentially creating this market for augmented vision that we have been anticipating.

The interest in our product offering is higher than ever. Probably the last two months, I would say, had more interest than in the previous year combined. And our job right now in sales and marketing is turn that interest into demand, and that's what we are focused on exclusively.

So the other contrast is, even three months ago, I think we were still trying to figure out where we should be applying our resources on these applications. And we -- we've done a lot of homework and a lot of talk with customers and three broad categories begin to emerge as far as places for Nomad to be used.

The first one and the most important one to us in the short term is the category called "Alignment Positioning and Navigation." That's where the Nomad device is used to guide the wearer in guiding a bulldozer, surgical instrument, an airplane, what have you, and getting more accurate, more safe results out of that. The fortunate thing for us is a lot of these applications are what we call plug-and-play. We are able to work with in a lot of these cases an original equipment manufacturer and actually plug our device right in, maybe some trivial software development to reverse the video, and we are ready to go.

The other categories -- there's one called "Realtime Monitoring" where we are essentially taking a sensor of some kind that can be as simple as a video camera or as complicated as forward-looking infrared gas sensors, electromagnetic sensors, all different kind of sensors and what do you with that is superimpose that over the world so you kind of have supervision, if you will. The third category is probably the biggest in the long term but also the most complicated in terms of an application development. And that's -- the industry jargon for that is "Electronic Performance Support System."

And essentially what that means is you've got a database with information in it, and that is fed to the user on a just-in-time basis for them to do a task. Like maintenance for a station. That requires a lot of software development and databases, wireless connectivity and a whole lot of other things.

So what we are doing now, as opposed to three months ago have really focusing our efforts in our first category, and we have a number of applications in our four market sectors -- four market sectors as you may remember are medical, industrial, military, and general aviation.

And the -- the applications really cover the gamut. We've got an electronic flight information system in general aviation. Very similar to that, in an application we just developed in the past three months, is marine navigation, where we can connect the Nomad to a radar system, for example, and there are actually three different applications of marine navigation, recreational boat, and they tend to be the higher-end boats given the price of the radar and our system, commercial boats, work boats of all kinds, and then defense applications, that involves both as well.

Another category is what we call "Indoor Measurement." This is where tracker systems are used for very, very precise alignment of manufacturing components, and we previously talked about a trial that we did at Boeing, helping to assemble a wing on a triple seven aircraft. One of the, we believe, near term applications is a category called "Machine Control," and this is the precision bulldozing application we talked about in the last conference call where you can combine GPS with a laser-based tracking system and actually get very, very precise control of graters, pavers and bulldozers and it is an excellent productivity tool.

Related to that, but probably a little further off is a category called "Geo-spatial Information Systems", known as surveying. And this goes hand in glove with the machine control application in that they are used at about the same time.

Steve Willey just returned from Japan where he met with one of the world's leading manufacturers of both machine control and surveying systems and got a little more information about the all of these applications and market sizes while he was there. And I will let Steve speak a little bit to those two market opportunities.

Yeah, thanks, Tom.

Regarding surveying, they laid out a scenario whereby an individual would, in today's domain, would carry a GPS unit, would be sighting through an optical instrument, would be reviewing some outboard electronic display and at the same time expected to drive stakes into the ground. And clearly, one needs four or five hands to get this job done, so it is accomplished today with two or three persons.

The advantage of a readable hands-free display, perhaps wireless to the reading instruments and such was so clearly evident, and, again, as Tom alluded, the volumes in that market are in the many tens of thousands per year. So certainly very exciting.

I think in particular, if I remember you saying, there were about 1,000 units a month of the measurement system, and this company, we believe, represents somewhere between 20 and 30% of the marketplace.

As Tom -- a couple of important themes are emerging here. One is, we really have begun to have real clarity about the applications. Two is that many of the applications and certainly this will be true for the launch applications, don't require a wearable computer of some kind. This is a significant shift, I think, in our thinking versus, perhaps, a year ago where we really looked that the as wearable display that would connect to a wearable computer. And I think this is really important.

What we are seeing here is that these systems where people are using GPS measurement systems in construction, radar systems in marine navigation, other kinds of instrumentation systems and in aircraft, are cases where people today are using these kind of information systems and by adding the Nomad display to it, we complete and enhance that product in a way that is almost immediately visible. So we really brought in a new focus to our marketing effort, and I think the result has been tremendous.

Tom mentioned that marine navigation is really a relatively new category. I guess it's fair to say, Tom, that we really felt the strongest pull in that segment from -- versus any other segment that we looked at today. And maybe you can speak a little bit to sort of what's driving that, but I think the important theme here is there is an opportunity to address and install base of systems using positioning and measurement technique, using instrumentation, using sensors, and not having to use, necessarily, a wearable computer, which, I think, comes into play much more in the performance support class of applications as we go forward.

And there's -- there's good reason to be very bullish about that on the long term. In fact, I ran into one of our salespeople on -- in the hall who was very excited because in the last day, he met with two very significant automakers, one Japanese, another European, who are very interested in trying to create drive performance support into their maintenance organization. And it has come up with a very interesting approach, which is to initially start looking at this in their training centers, and, in fact, we got very valuable information from service technicians using the display on the spot. And we are seeing movement in that direction unlike what we have seen before.

Okay. I just wanted to finish up the list of applications before I move on to some of these more specifics.

The last application is kind of our lead application, and the one we have been talking about the longest, and that is computer-assisted orthopedic surgery. We talked about Stryker Corporation. one of our launch partners. And a lot of really good work there. That's probably, by far, the most difficult application as well because it is really the next generation of what we are doing, which is called augmented reality as opposed to augmented vision where they are actually superimposing a cut here lines on the patient to aid the surgeon and make the procedure faster, more accurate.

So I just -- I got back a few weeks ago from a trip over to Austria where I helped in some of the software development that Stryker was doing and got to see what I think is the face of the future, which is not so much about orthopedic surgery, it's about our device becoming a commonplace tool in applications such as this, and it really enabled the entire procedure. And the common theme is how you consume the information and that you are not looking at a static included display off to one side. You are looking at the real-live patient and getting this realtime update of information superimposed on that. So it is very exciting.

This, like a number of these applications, are tied to an OEM. And Stryker has delayed their launch a little bit so that it will probably be sometime -- sometime in the second quarter of 2003 before they actually launch their system, but we expect by the end of this year to have some orders for Nomad that will go into those systems. So we continue to be excited about that application.

My understanding that S that we will see our first significant order from Stryker sometime in the next several weeks.

Now, Rick talked about the marine application and the world's largest manufacturer of radar systems is Furuno. We were invited by them to participate in their exhibit at the big boat show in South Florida in Ft. Lauderdale. We were there last week. It was about a week-and-a-half-long show and showing Nomad hooked up to their radar system and got just tremendous response and as a result of that signed up a number of dealers as resellers for the Nomad system and are in discussions with Furuno for a co-marketing arrangement in the future.

So once again, we have got recreational applications, and there are hundreds and thousands of boats in the world that fall into that category. And commercial vessels as well, and there are tens of thousands of those. This is a safety benefit in this particular instance.

So you can look out of the bridge of the boat and see all of your navigation information at the same time. You can display GPS information, a moving map same as in the general aviation, or you can display radar information as well. So you can keep an eye out for obstacles and certainly where we live in Puget sound, there are a lot of degraded visibility days where this sort of thing comes in very handy.

I think that's going to be very promising. I just want to summarize on Nomad with a couple of remarks.

One of the things that we have found that has really helped in recent months is that we have been able to configure the Nomad in a variety of different ways for many of these applications, and so in a construction GPS space, one of the questions is, can this display be mounted on a hard hat or helmet and we have done that work and shown that, in fact, we can adapt a display for these kind of environments, and we have done several different instances of the product in that way, and it has proven to be absolutely quite flexible and quite adaptable in that regard. We have also had instances where we wanted to be able to take a S video input into the system instead of a SGVA.

We have done work to create a low-cost adapter for that and that will help open doors in the market as well, as well as wireless link. Some of the work we did with Furuno, in fact, involved actually a wireless link to the Nomad display.

Another key piece of bringing this product to market successfully is bringing the price into range. We have done a lot of work, really substantial amount of work, on price elasticity and demand elasticity in these various segments. The current price point as mentioned in today's press release is just under $7,000 versus the $12,000 suggested retail price and so far the market has responded quite well to that.

The dynamic of going forward and what we have here and it is very different than the situation we had six or nine months ago. We have a handful of key vertical markets with applications that we have worked on that we have evaluated, quantified productivity benefits, developed a ROI case for, and in many cases have distribution sponsorship for. We now have new pricing. We have a product that is fully qualified and really ready -- at a much greater state of readiness to bring it to market.

What we would look for is anywhere from 100 to 300 units in each of these application categories over the course of the next year plus. And adding some additional applications to that, we think that's what is going to comprise the bulk of the Nomad sales volume that we will see during 2003. We will continue to also see some seating of newer applications in parallel with that.

We also have a military opportunity for Nomad, which would represent substantial upside to that, would potentially add anywhere from 60% of our projected volume to -- to doubling our projected volume for the product next year. But it is very difficult to forecast, and so we are treating it as upside as something that if we win that, that would provide substantial upside. The application there is a small patrol craft. It is a six-man boat. Four gunners, a navigator, and a pilot.

Part of the application is connecting to a radar system to allow that -- that pilot to view radar head-up while moving quickly in a narrow channel. Part of the application is also to connect those gunners to infrared sites that can be more effectively sighted to the weapon. This -- we have gotten strong pull to date, but that would be viewed as upside and potentially substantial upside if we were to win that sort of award.

In general, I think we are very pleased with the market development activities. We are seeing some loosening of the purse strings in the marketplace. Some budget constraints we think beginning to alleviate as we move toward 2003. We are hearing lots of that sort of talk in the current quarter. New budgets coming on-line and so with those combined, the dynamics, we look to see substantial growth in product revenue for the product.

This is a product that has been extremely well qualified. Someone commented earlier today that we have seen nothing come back for any kind of tech support or maintenance in the last 60 or 90 days and we've had a number of units out in the field for several months now. So we are feeling very good about -- about that aspect of the product.

Flic is our personal bar code scanner product. We launched the product and was a very successful launch at Frontline Solutions on September 25th. Since that time, we have been endeavoring to ramp up production on the product, and we have encountered some issues relating to scalability and yields of the product.

These issues have confounded us a little bit in that they are not issues that we saw here during our production control runs, but that have cropped up in the move to higher volume with our contract manufacturer in -- in Indonesia. I would emphasize these are scalability issues. That the basic design, in fact, of the bar code scanner is very, very sound and in fact, the life testing of the product is actually demonstrating lifetimes about ten times the actual product specification. So we would -- we would warranty the product with an expected life of about 25,000 scans; we are demonstrating in our life testing scans up to as many as 250,000 to 300,000 scans.

So the processes we are engaged in now are really a series of tweaks to enable that scaling of the -- of the production to thousands of units per month. The demand we think is there. We have units today. There are orders in hand today for several hundred; we expect in the next several weeks that will become several thousand with orders pending. So we will likely enter -- certainly enter December with a backlog and endeavor to start delivering against that backlog just as soon as we can.

You folks are aware, I think, that part of the distribution strategy for the Flic personal bar code scanner and an important part of that strategy is to distribute a branded project through -- a product through our distributors like Tolt and Abraham and Keystone Processing Group and distribute the product as an OEM labeled product and I believe we will be able to announce a successful conclusion of OEM relationships in very short order. In fact, one of the reasons that Mr. Lee and Mr. Sydnes are not with us today is that they are concluding those negotiations early this morning and we are very pleased with what we hear so we look forward to what we hear in the next couple of weeks, if not sooner, being able to talk more about that OEM opportunity with Flic.

We also have distribution interest in Europe and Korea. The product has at Frontline, when I was there, I noted strong interest coming out of Latin America, as well. So the basic product positioning in terms of price performance, I believe, played very well to the marketplace. We came out the Frontline show with several hundred qualified leads, and I have seen salespeople walking around with big smiles on their face when we ask them how it is going. The product has attracted enormous interest.

Sortly after Frontline, we attended a developers' conference of one of the major players in the XP tablet domain, the Windows XP tablet computer maker. And we demonstrated there a, a prototype of a blue tooth wireless version of the Flic personal bar code scanner. It was extremely well received.

The current wireless products, bar code scanners in the market range in price from $1400 to $2400. Our blue tooth version of the Flic product would likely retail anywhere from $350 to $400. So a substantial -- substantially lower price versus what is available on the market today and we think the timing of that could be very good. We do not have a specific date for introduction of the product, but it will be during 2003, and we will continue to keep you informed about that. It is not a tremendously expensive or challenging exercise in terms of the engineering end of the blue tooth module.

We think that product is going to do very well for us. It would -- obviously the unit selling price is about three times what we would expect the unit selling price, average unit selling price for the -- for the Flic without the blue tooth radio in it. So we think it is a potential way for us to drive some incremental revenue and flush out the product line. But in general, the product line, as I stated, is being very well received.

Our third revenue category has historically been development contract. We expect as always to see our new contracts in the early part of '03 from DOD. As I mentioned earlier, one of the newer dynamics in the business is we have seen development contracts from commercial partners in the automotive and in the consumer electronics space, and as well as our work with J & J Ethicon. So those create some smoothing of that DOD seasonality and we will be looking for continuation on several of those projects and is certainly continuation of projects within those product categories.

We have a letter of intent from a second major European auto maker in hand today and expect to see a purchase order on a contract imminently associated with that continued development. I am going to come back a little bit and talk about some of our future opportunities in automotive and in consumer products and going to ask Steve Willey to speak very briefly to the consumer product opportunities as well.

We do expect new contract revenue. Our backlog tends to run down through the end of the year and then be renewed and reached its highest levels during the first quarter.

I mentioned just a moment ago that we are seeing Nomad interest from the Navy on special operations command arena. We are also seeing some other government interest in the Nomad.

Clearly the marine navigation has applications for Coast Guard, as well as Navy, and there are other land-based applications and aviation applications within government agencies and DOD agencies, where the Nomad is starting to attract some substantial interest as well. So we are going to see, I think, continued interest in maturing base technology through these contracts, but I would suspect that we should also see coming into the mix either purchase contracts or systems integration-type contracts to help drive new applications for the Nomad, specifically for some of these government customers.

In the area of defense, I think a notable development that we would be talking more about very soon, and this is extremely powerful, because it costs us next to nothing to do. We have developed a monochrome green cathode ray tube replacement for small weapons sites and small head-bound displays used throughout a variety of military products using a scanned blue UV laser onto a phosphor plate. It works like a cathode ray tube but there is no tube, there is no vacuum and create a substantially more reliable device without the aging issues that plague miniature CRTs today. The reason this is so exciting is because this is extremely low technical risk.

It is basically the Nomad engine using a different laser as a replacement with literally a piece of glass, spray painted with phosphor in front of it and is addressing a potentially large replacement market that today, specifically, is very troubled by the state of CRT technology and the status of vendors in that state. So there is a real opportunity for a significant replacement market. Where we are today is just bringing this out the lab, it's an image quality test today.

We will be showing this to some customers for light-armored vehicles and other military applications, but it has significant potential to develop into a business and potentially very, very quickly. And it is, again, based on available technology. So a great example of leveraging the platform technology.

Other work that we are doing. We recently reported that we had reduced the size of our consumer product engine by about 75% in the last nine months. And I point to this in particular because one of the themes that we want to see in our business is, in fact, the shrinking development cycle. Can we move the technology further, faster, as we progress. And I would assert we are seeing that in spades with this development.

Steve can talk to us to a little bit about where that's headed with digital camera viewfinders, but I think another important piece of that development is it is just showing us how -- how rapidly we can mature the technology, and, in fact, the pace at which we are maturing and advancing the technology is actually accelerating. We are driving that up through the kind of curve we want to see. So we are getting more technology output per man hour input is another way to think of it. As time progresses and that's obviously something we all want to see.

I think what Tom has pointed to, to try to set the stage for, is that we also expect to see a shrinking sales cycle with respect to the Nomad display and a more manageable and predictable sales cycle as we go forward particularly having to identify some of these launch applications. The shrinking development cycle compounded with the shrinking sales cycle I think puts us in a very strong position as we go forward into next year.

One of the reasons that we continue to invest in the technology and invest substantially in the technology is we see some market opportunities that build on but go well beyond the market opportunity for Nomad. We believe that the Nomad market opportunity over the next three or five years is going to be anywhere in the 100 to 300 million dollar annual, sort of, revenue production range and we get there by having a $2,000 to $3,000 display that we can sell 100,000 of a year and we think our market numbers support that.

Building on that, though, we see a market emerging, and a very strong one, in the consumer electronics space, which requires a $40 full-color display solution, and we believe that volumes in that category can achieve 5 to 10 million units annually. And our experience over the past year have been especially enlightening and I think especially rewarding with respect to this opportunity.

I will kick it off, Steve, by saying that in February, you went to Asia really for first time with the display that combined LED light sources, low-cost LED light sources and a MEMS scanner and that the impact was considerable. Soon after that we signed our first development contract sponsored by a significant player in the consumer electronic space. And since that time, we have really worked to define where the early market is, in particular, and why don't you talk a little bit about what you have seen in the digital still cameras, digital cameras and the whole concept of what we call an EVF or electronic viewfinder and what that means for the market today.

Yes, certainly.

With regards to our large unnamed Asian customer, we did complete on that work in the last quarter and we expect continued sponsorship by that partner and perhaps other partners. So our model, our business model, is functioning well. That coupled with the fact we have seen a reduction in size has enabled us to be fairly aggressive with other prospective partnerships in Asia and we have learned a lot more about the electronic viewfinder situation.

It is moving from an optical viewfinder in a digital still camera to an electronic viewfinder. What's interesting for us there is it is becoming a defined market and we are not having to create that market and four and five large camera manufacturers have released products with very primitive electronic viewfinders. It allows us to step in as a replacement component and, therefore, the timing, we believe, is exceptional for us.

Another thing we are going to do in the near term, in the next couple of weeks, in fact, is to take this miniaturized viewfinder and package it into what is a digital still camera and be able to demonstrate that actively in our marketplace. I think that's going to be very intriguing for the perspective Asian partners who are looking to see kind of a validation of our electronic viewfinder approach.

I want to put a finer point on one of the key points that I think Steve made here. Virtually every one of the major players in the digital camera marketplace to date has produced a product with an electronic viewfinder. So if you go to your local camera store and look for an Olympus, Minolta, Canon, Nikon camera, you find one model with an electronic viewfinder. The mismatch is you are looking at a $1200 to $1500 camera where they are putting these electronic view finders.

In most cases that camera is capable of producing 3 million pixels on a sensor, and the viewfinder is showing you about 100,000 of those pixels, literally looking through these electronic viewfinders, you see the pixellation, the color is low fidelity, it is very poor color reproduction. And you have no way to preview the image in a meaningful way.

The good news that's really worth pointing out here is that the camera makers are moving in the direction of electronic viewfinder, but they can't get enough pixels per dollar to really drive image quality into those cameras, and that has been the emphasis behind our consumer product strategy all along. We believe that we can deliver six or eight times the resolution that they are experiencing today at a price point that our competitors will not be able to achieve in that $40 to $50 domain.

Very likely we'll enter the market with a higher-priced product for lower volume cameras in the hundreds of thousands of units, and as we drive costs out and price down, drive-to volumes in the millions and even tens of millions of units annually. We expect that by 2005 our market research suggests that there will be somewhere in the neighborhood of 45 to 50 million digital still cameras produced annually. There is another component of this which is digital movie cameras, as well as high-end video equipment

That's about an additional 15 million units per year, and that's got interesting recently because your digital camcorders are moving from 3,400 lines to up to 1,000 lines so now they gain the same benefit of the high resolution, desktop quality electronic viewfinder and that uniqueness of being able to preview at desktop quality at film quality, we don't see any of the competitive technologies advancing to even close to that goal.

The other thing we did learn in the last couple of months is that there is a trend toward higher zoom cameras. And you will notice today in the stores you buy a two or three-times optical zoom camera at a certain price point but if you move to six or seven times zoom, the camera gets large and bulky. The solution to move to an electronic viewfinder. Now there is great emphasis in the market to move too high-zoom cameras with electronic viewfinders and high-zoom cameras are expensive cameras, and, therefore, the need for high-quality electronic viewfinders is even stronger.

Really two key trends to drive this UEF marketplace. One of which today is higher optical zoom because that then requires today if you are using an optical viewfinder, an optical viewfinder that is bulky and complex and expensive.

The second trend we are beginning to see but you will see much more of over the next two or three years in this camera marketplace is on-board processing of the image. So, in other words, you will be able to add color enhancement, red-eye reduction, lighting effects, simulate filters, and things of that nature all digitally on-board the camera and that is not terribly useful unless you have the means to preview the electronic image with a high-quality display and that's really what is driving the interest. We will end this which I think what is a quote that may sum it all up. One of the leaders in digital still cameras, general manager of the DSC group, looked at our display, and he said, you know, customers don't mind so much the display that we have in the camera today, but it is only because they don't know better. Once they see this, they will never want anything less.

And we think that is very much the theme. That when you have this sort of superior image quality, as something consumers are going to recognize instantly. I think when Steve goes back to Japan next week with the 75% size reduction accomplished in just nine months, that's going to create even greater momentum under those -- those partnering activities.

As Steve says, in terms of what we look for near term, we do expect a second phase of development to occur with our existing partner. We also expect to see additional partners get involved in this category driving forward.

Some of you may have seen that BMW recently showed a -- a laser-scanning display in a 7 series automobile at two automobile trade shows. That is very significant. That really marks the beginning, because BMW, as you know, has wished to remain discreet up until this point. The reason they decided to emerge and start talking about the technology is they felt we had achieved certain technological milestones. Their own due diligence work had achieved certain milestones which gave them greater confidence in the technology going forward that this is something that legitimately can be incorporated into the automobile. The strategy that they are articulating, and, in fact, I think there is literally some PR activity in Germany this week around this, is one in which the technology would -- would actually be a platform technology within the automobile. What they demonstrated at the auto show was a rear-seat, full-color projection system for entertainment, for watching movies in the back seat of the car.

And it was somewhat magical and very sexy because you looked at the rear seat of the car and you saw an image that appeared to be somewhere in the front seat of the car. And the color saturation and the brightness and image quality were all very notable.

The -- having said that, what they were really doing there was attracting attention to the technology. There are some applications within the automobile which we believe are more attainable in the near term. Those involve reconfigurable dash panels and instrument clusters and stacks.

We believe that there is going to be, again, to look for in the short term continued sponsorship in the automotive area.

A couple of key points I would mention here. We had essentially no cost in providing this demonstration of technology to BMW because all of the nonrecurring engineering was recovered by the customer/partner in this regard. We have qualified and understand the market opportunity as a result. Today, we are not sitting here with a three or five-year plan that has any revenue associated with automotive. That may change significantly as we go forward here.

What we were able to do is take our base platform technology, again, and in the space of about 90 days, adapt a Spectrum/Nomad display into something that could be used in the automobile environment. By the way, the third exercise we undertook for BMW in the space of a year for applications within the automobile. A point of strategic interest here is here again, evidence that this technology can be very quickly adapted and very quickly leveraged into some very sizable market opportunities, and we can leverage that kind of sponsorship as well.

Another example of this is the work that we are doing with the Ethicon endodivision of Johnson & Johnson. This work is aimed at imaging. We can't say a lot about what the particular product is, but, again, it is an example of how we are able to use commercial sponsorship from a third party to drive platform technology in two ways. One that is specific to their applications and product requirements and address as specific product opportunity. And, two, actually drives that technology as a platform to be able to address a broader range of market opportunities.

And that's a strategy we believe that is working and has worked in the last year better than we have ever seen it work in the history of the company. I would like for Tom Mino to talk us to for just a few minutes about developments at Lumera. There have been some significant developments and are more to come, but Tom, why don't you share with us some of what's happening in your neck of the woods.

Thanks, Rick.

Lumera continues to make timely progress on its technology and product plans while staying within our budgetary forecasts. We are currently in the prototyping phase of our ten gigabit modulator, and we are still planning on having engineering samples available by year end. So in the optical component space, we are on plan, and continue to make significant progress as far as the performance and device itself is concerned and the reliability of the device is concerned.

Having said that, we continue to see a push out in the recovery of the optical component market. Therefore, we are investigating opportunities in other markets for our propriety polymer platform technology, and we are spending significant efforts right now from a marketing and from a technical standpoint at looking at other opportunities that may have near-term revenue potential versus the long-term potential we see in the optical component market. We are currently working on several proposals to provide Lumera materials and device capabilities to potential material components and system partners. And those negotiations continue on a daily basis, and our expectations are that in the near future, we will be making some significant announcements relating to partnerships and development agreements with other companies.

Thank you, Tom.

To summarize, again, thematically, growing product revenue, also our new line of commercial contract revenues, controlling and reducing costs, moving toward profitability while driving growth are the key themes of our business plan and strategy going forward. We are seeing evidence of progress through a shrinking development cycle, a shrinking sales cycle, a more manageable sales cycle associated with bringing a new product like Nomad to market.

We have, today, a management depth; i.e., execution ability, market opportunities that are greater than it has ever been before. Market opportunity where we have greater clarity on the early market opportunities for Nomad and applications for that product than we have ever had before, and technology that is more mature and maturing at a faster pace than it ever has before in the company's history. So we feel we are very well poised to take advantage of significant growth opportunities in the year ahead and to follow.

I had a conversation with the portfolio manager yesterday who had an opportunity, who have owned this stock for about a year, had an opportunity to see the Nomad and understand it for the first time, and his first comment to me was, well, this appears now to be a much bigger market opportunity than we had first thought. And he's really just beginning to understand the pull on some of these vertical markets.

We have had tremendous reaction actually in recent weeks from investors who are knowledgeable about one or more of these vertical markets and understand the kind of visualization challenges that the product addresses and that creates a market opportunity for us. So we continue to be enthusiastic about the near-term and long-term growth prospects for the company. We are working diligently to bring these products to market and create high-quality channels of distribution and applications for the products. I would like to now turn it over to Q & A. We are happy to take questions.

At this time, I would like to remind everyone in order to ask a question, please press star and then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q & A roster. Your first question comes from Joe Eshoo of Ratman and Renshaw.

Hello. I have a few bookkeeping questions first. Can you tell me what the Lumera revenue number was for this quarter?

Lumera was just less than 300,000.

And shares outstanding Cap Ex and depreciation?

Shares outstanding are 15, 2. Cap Ex for the 9 months is a million 1. And depreciation for the nine months is 2 million, 1.

What about the number of Nomad units that you sold. You've reported first six months that you sold 50 --

We shipped about 48.

48?

48 this year 2 last year right at the end of the year. Through the end of the quarter it was about 45. Of some substance.

What was the product revenue, as a percentage of your total revenue?

Product -- a couple of percent. Well, let's see, one, two, three -- about three to four percent for the year to date. Less than $500,000 from year to date. On the quarter, it was 100 in a quarter. So relatively small contribution at this point to overall revenue.

Okay. Okay. Um, I guess now I have a few questions for Steve. You know you talk about your consumer market opportunity with electronic viewfinder. Could you go into a little more detail as to when you see a potential entry of your product into that marketplace and what type of ramp-up do you see over what type of time span. Why not stretch it out maybe three years from now?

Yeah, obviously a lot of this is subject to participation with our partner customers but we are getting good visibility -- starting to get good visibility already.

I think it was mentioned that in the 2004 period, we are expecting to be building engines for delivery to customers which may not release to market until the following year. They have their own cycle obviously of building engines into products. We will start with relatively low volumes because we are going to reach into the higher end of the consumer electronics products digital still camera products.

In the lower volumes, I suppose, could be in the high tens of thousands to hundreds of thousands of units, but the ramp into millions per year should be fairly quick. What we've heard from the still camera manufacturers is that if the -- if our solution is -- is as effective as they believe, that they would not limit it -- its use into a single product. They would put it through their line fairly quickly, recognizing that's how they drive cost out, you know, the scale issues, of course. So I think we'll see some manufacture in 2004 turn into products in the 2005 time frame and I think we will see substantial ramps through 2005 and 2006 into the millions of units per year certainly.

Okay. So I would imagine from what you are saying there is probably a 12-month design cycle in which they will have to design a prototype into their unit -- 12 or 18 months?

Yeah, it is not entirely serial. It is a partnership so you are working in parallel as much as you can and a delivery of our engine into a substructure of a camera, for example. You can probably count on six months but not 12 months.

Okay. So probably by midyear next year, you would have a pretty good feel as to the potential of that marketplace over the next 12 months from that point in time.

Yeah, by the middle of next year we will be making decisions about putting capacity in place late of 2004.

Okay.

There's also the potential of --

Most aggressive pull that we've seen -- and it is far more aggressive than the time line we just described I think gives the flavor for the market pull was the spring '04 product introduction. And I don't think that is in the cards because we would be talking about design end starting very soon.

Right.

But that is the most aggressive pull. That particular manufacturer, just to give you a sense, a flavor for this market produces five new products a year, and each of those products is typically on a one-year design cycle start to finish. So that is one certainly toward the more aggressive end of the spectrum, but they are significant market share.

As I mentioned it comes down to how aggressively our partners want to participate. If they would like to participate significantly from a financial or other resource standpoint, then we can move some of these numbers to the left.

Could you speak to the number of people or potential partners you are exploring utilizing your electronic viewfinder solution?

Well, in terms of a dialogue, and opening up discussions, obviously you start with a larger number, and there are probably five to eight candidates we have been in dialogue with. In terms of a reasonable launch group, that could be as few as one if they were willing to be very aggressive in terms of their volumes and as many as several. So I think we are -- we are qualifying and we are coming down to a short list, if you will, and as you pointed out by the middle of next year, we will be making decisions about specific ramp volumes and specific designs.

Just to add another data point. If we started to take the assumption that the entry point is in the prosumer enthusiast segment of the market, what you are aiming at is where is the dominant market share come from in that category. About 80% of the market is accounted for by three or four players. Certainly in that category of the market. So we are continuing to really focus our discussion and dialogue with -- with those folks. And, again, I would add it at very, very senior levels of the organization, general manager and above kinds of levels. So I think this --

I think the other thing to consider is, we talk about this being a platform technology, and clearly the interest here is to extend beyond electronic viewfinder and you are seeing the convergence or certainly reading about the convergence of digital cameras into handsets, cellular handsets. I have seen a number reports that put 25% of cellular handsets a couple years out will you have digital cameras. The manufacturer of handsets will come looking for electronic viewfinders and this adds to the numbers that Rick and I have been sharing.

One thing I would add there is, we have talked in the past and continue to focus on opportunities in wireless communications. We should be able to announce soon that we have support from one of the significant network operators in Europe to begin doing focus group testing on device designs that would feature retinal scanning display implementation in them.

The key attributes that we get to really quickly when talking to folks in the wireless domain are human factors and usability. So the actual device design, design of the optics, distance from the eye, where -- how the device is held, the comfort of the viewing experience, are all key factors in opening the doors to that marketplace. And why we think we are seeing this support is that people have either implemented or, in the process of implementing enough wireless devices where they have quickly recognized that the display is the key limitation for driving wireless network revenue to subscribers. And so, that continues to be, we think, a very legitimate focus for consumer electronics volumes in the future as well.

Clearly there will be new applications in the future for these 3, D and other enabled handset and what's vital that we match our specific output solution, display solutions, to those applications and that's why the relationship with the carrier at this early stage is so vital.

Okay. Okay. Thank you for your help.

Thank you.

Your next question comes from Mort Languor of Langour Partners.

I have one question. Can you shed some more detail about the production problems at Flic and when the difficulties will be resolved?

Yeah, I think I should put our shareholders' minds at ease regarding this. What we have done is added a couple of cycles in our launch program, the build program specifically and this is really all about managing and preparing for the scaling that we certainly anticipate. So what we are doing is, we've got a couple of low-volume runs with testing at our offshore facility using final documentation. And it really is a process of tweaking the activities, the steps on the line before we finally throw the switch. This is entirely consistent with our ISO9000 practices at Microvision and basically just steps we decided to take before we ramp.

Thank you.

There are no further questions at this time.

Well, thank you again, everyone, for attending the call today. I hope you notice that in addition to the new hour, we managed to bring this in a little faster than we have in the past. I hope you will forgive my longwindedness in the past, it is truly due to enthusiasm. Thank you again.

I think again what we see as important is where we have come to as a company versus where we have been in the recent and distant past is a period of time where we have a team that can execute, opportunities that are real and well qualified and well understood, applications that don't necessarily require wearable computers to make the Nomad display valuable and a technology, again, that is maturing at a more rapid rate than it ever has in the company's history. We do want to continue to drive growth and revenue toward profitability, and we think we are in a position to do that going forward. Thank you, again, today. And we will look forward to speaking with you again next time. And many of you before then, I am sure.

Thank you for participating in today's Microvision third-quarter 2002 financial results conference call. The teleconference is over, you may now disconnect.